From time-to-time, a lender will encounter a scenario with an SBA 7(a) loan wherein an obligor requests that the lender modify or release the lender’s lien against collateral, which may be either real property or personal property. To properly consider and document a modification or release of collateral securing an SBA 7(a) Loan, a lender must be cognizant of a number of requirements, set forth in Chapter 8 of SOP 50 57 (2), that must be taken into account when modifying the collateral securing an SBA 7(a) Loan.
When faced with a request to modify or release collateral, lenders should consider the following, in conjunction with the SOP:

1. Review the current version of the SBA Servicing and Liquidation Actions 7(a) Lender Matrix. The Matrix will advise the lender whether the proposed action is one that the lender may take unilaterally, or which may require SBA prior approval. Also, it is best practice to print a copy of the current Matrix and retain it in the loan file, as the action taken pursuant to the current Matrix is ever evolving.

2. Ensure the action to be taken is in compliance with the lender’s policies for addressing such requests for similarly sized non-SBA loans. Just because the Matrix allows the action, it is important to show SBA that the lender weighed compliance with its own policies for non-SBA loans.

3. All requests from obligors for the modification or release of collateral should be documented, in writing. The request must document the borrower’s continued ability to pay the loan, that the modification or release will not materially interfere with the operation of the business, and that the recoverable value of the remaining collateral is sufficient to secure loan. The lender then must perform its own analysis of each of these issues, before approving the request.

4. Document the present value of the collateral that is proposed to be modified or released. While the SBA Servicing and Liquidation Actions 7(a) Lender Matrix delegates authority to a lender to release or substitute collateral and/or subordinate or release liens, for any amount, the lender should document the present market value of the collateral to-be-released and the rationale for the release of the collateral.

5. If the released collateral is to be sold, confirm whether the proposed purchaser of the collateral is a close relative or associate of an obligor. The sale of collateral to a close relative or associate of an obligor requires prior SBA approval, pursuant to the SBA Servicing and Liquidation Actions 7(a) Lender Matrix. SOP 50 57(2) defines an “associate” pursuant to 13 CFR § 120.10.

6. Properly document the request for modification or release of the collateral. While the lender may have the authority to modify or release the collateral, documentation evidencing the agreement for the modification or release of the collateral is crucial. The lender should be certain that the document facilitating the sale or release is proper, i.e., not signing a “satisfaction” of a mortgage or deed of trust when a release or mortgage or deed of trust is acceptable, in order to ensure that only the lien at issue is released. Vendors operating on behalf of the obligor may be careless in the documentation they provide for execution by the lender, so a lender should review documentation carefully before proceeding with execution.

7. Consult with a lawyer to ensure that local laws do not create a potential issue. Each jurisdiction varies, so the lender should confer with legal counsel familiar with the location where the collateral is located. For example, in certain jurisdictions, accepting proceeds from the short sale of real estate can create an argument that the lender has accepted the funds in full satisfaction of the loan.

There are a number of additional considerations that may come into play in any specific request for the modification or release of collateral, pursuant to SOP. Failure to properly analyze and document a request for modification or release of collateral can result in a recommended repair or even a denial to a lender’s SBA guaranty.